Introduction
1
Introduction
David Gruen and Terry O’Brien
Globalisation is perhaps the topic of the age. Globalisation means different things
to different people, but a key economic dimension of it is undoubtedly the opening
up of economies to international competition, allowing goods, ideas, capital and
some people to move more freely between countries. Many countries around the
world have embraced these aspects of globalisation, because governments have
become convinced that a more dynamic economic performance awaits countries that
more closely integrate with the global economy. And yet, because it brings with it
more rapid domestic economic change, globalisation can be disruptive and can
generate losers as well as winners. If for no other reasons than these, globalisation
remains an issue about which there is much debate.
Australia’s experience with globalisation has fitted this general pattern, with
closer international integration being associated with an improved economic
performance over the past decade or so, but also with more rapid domestic economic
change. The Reserve Bank’s and Treasury’s interest in globalisation was stimulated
both by this Australian experience, and by Australia’s involvement in the G-20
group of countries.1 The inaugural Chairman of the G-20, Canada’s then Finance
Minister Paul Martin, proposed in 2000 that the G-20 study the policy challenges
posed by globalisation, and the Australian Treasurer, Peter Costello, suggested case
studies of member countries as one aspect of that work.
The idea of a conference on the topic of globalisation, living standards and
inequality grew out of this enhanced interest in globalisation on the part of the G-20.
The aim of the conference, jointly hosted by the Reserve Bank and Treasury, was to
bring together leading researchers in the field, along with statisticians and policy
advisors from the G-20 countries, to seek answers to a range of important questions.
What have been the broad trends in the global distribution of income over the past
few decades? What role has globalisation played in generating these trends? Are the
implications of globalisation for income inequality and poverty different for developed
countries than they are for developing countries? What policy implications flow
from these broad trends? What progress is being made in the international statistical
architecture to improve the quality and international comparability of statistics on
poverty and inequality? What more needs to be done? The papers in this volume, and
the discussions which accompany them, attempt to shed light on these questions.
1. The G-20 is comprised of Argentina, Australia, Brazil, Canada, China, France, Germany, India,
Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Korea, Turkey, the United
Kingdom and the United States (19 countries in all). The finance minister of the country holding the
(rotating) Presidency of the European Union, the President of the European Central Bank, the
Managing Director of the IMF, the President of the World Bank, and the chairpersons of the
International Monetary and Financial Committee of the IMF and the Development Committee of
the IMF and World Bank also participate in G-20 discussions.
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David Gruen and Terry O’Brien
Global Inequality and Extreme Poverty: The Broad Trends
There appears to be widespread agreement that global inequality widened for
much of the past two to three centuries, and the absolute number of people living in
extreme poverty rose (even though the proportion in extreme poverty fell over this
time). From around 1980, however, there is some evidence that these trends have not
continued, and may in fact have reversed.
There have been two important trends since about 1980. The first of these has been
an acceleration in economic growth in many of the world’s most populous countries
– particularly the Asian countries of China, India, Bangladesh and Vietnam. These
countries, which were among the world’s poorest as recently as 1980, have all grown
faster than the rich countries, in per capita terms, in the period since then. Largely
as a consequence of this improved economic performance in these populous Asian
countries, the poorest one-fifth of countries in 1980 had a population-weighted
annual per capita growth rate of 4 per cent from 1980 to 1997, compared with
1.7 per cent for the richest fifth of countries over the same period, as David Dollar
points out in his contribution to the volume. The experience of the fastest growth
occurring in the poorest countries is a new one, at least in the modern era, with the
growth rates for these same country groupings in the preceding two decades
(1960–1980) being 1.8 per cent for the poor group and 3.3 per cent for the rich group.
The second, and much more problematic, trend has been the continued poor
economic performance of most of the countries in Africa, with some countries
experiencing declines in average living standards, not only relative to the rich
countries, but even in absolute terms.2
These two opposing trends have had important implications for global poverty
and inequality over the past two decades. On the basis of the admittedly imperfect
available data, there appears to have been a huge fall in the number of people living
in extreme poverty outside Africa, offset to some extent by a significant rise in
extreme poverty within Africa. Dollar argues that 200 million is a conservative
estimate of the net fall in the number of people in the world living in extreme poverty
(subsisting on less than the purchasing power parity (PPP) equivalent of US$1 a day)
since 1980 – and that this fall has occurred despite growth in the global population
of about 1.6 billion people and a rise in extreme poverty in Africa of perhaps
170 million over this time.3
2. It should be noted, however, that while these trends have occurred for much of Africa, there have
also been some African economic success stories, such as Uganda and Botswana.
3. In a recent paper, Angus Deaton (2002) comes to a similar conclusion: ‘according to recent
calculations by Shaohua Chen and Martin Ravallion (2000) of the World Bank using all of the
household survey data since around 1980, and with due recognition of the data’s many inadequacies,
the best current estimate is that there are indeed around 200 million fewer people living in [extreme]
poverty now than 20 years ago’. Robert Wade, in his contribution to the volume, argues that the data
are not reliable enough to be confident that the absolute number of people living in extreme poverty
has fallen, although he thinks it ‘quite plausible that the proportion of the world’s population living
in extreme poverty…has indeed fallen over the past 20 years or so’ (p 42).
Introduction
3
The divergent economic fortunes of the populous Asian countries on the one hand
and much of Africa on the other, has therefore led to the ‘Africanisation’ of extreme
poverty. The contrast is particularly stark when one compares 1960, when Africa
accounted for only about one-tenth of the world’s extremely poor, with 1998, when
this proportion had risen to about two-thirds, as Ken Henry points out in his
comments in the volume.
Turning from extreme poverty to inequality, there is a broad consensus that global
inequality was on the rise throughout most of modern economic history. Indeed, one
might define ‘modern economic history’ as that period since living standards in the
leading countries of the first industrial revolution accelerated away from those in the
rest of the world. The rapid economic growth experienced over the past couple of
decades in the populous countries of Asia has, however, been a force acting to reduce
global inequality. As with global poverty, the narrowing effect of robust Asian
growth on the global distribution of income has been offset, at least to some extent,
by developments in Africa.
To come to an informed view about the recent trends in global inequality, it is
necessary to first decide on the appropriate way to compare income (or consumption)
across countries. As explained by Peter Harper and Steve Dowrick in their
contributions to the volume, the conceptually appropriate approach is to use
PPP estimates to convert domestic-currency values in each country into a common
currency, rather than using market exchange rates.
Ideally, a measure of global inequality should take into account both within and
between-country distributions of income (or consumption). It also seems sensible to
conduct the analysis in population-weighted terms (rather than giving each country
an equal weight), so that each individual’s experience of rising or falling income has
the same weight in global inequality, regardless of where they live. Finally,
inequality can be summarised using a range of different measures (such as the global
Gini coefficient) that, in one way or another, collapse the whole distribution of
income into a single number to allow comparisons to be made between different
distributions.
Even when these conceptual choices have been made, and agreement reached
about which summary inequality measure to use, some doubts remain about recent
trends in global inequality. Dollar argues that, following a long period during which
the global-income Gini coefficient had been rising, there has been a modest fall in
this measure of global inequality over the period from 1980 to 1998. Dowrick and
Akmal (2002) reach a somewhat different conclusion, finding that the global-income
Gini has been essentially flat over the somewhat shorter time period, 1980 to 1993,
when allowance is made for a technical shortcoming in the way PPPs have been
aggregated for much of the world. It is worth noting, however, that whether global
inequality (as summarised by a global-income Gini coefficient) has fallen modestly
in the last couple of decades, or remained essentially flat, this development would
4
David Gruen and Terry O’Brien
still represent an encouraging and little-recognised change from the long-established
historical trend of rising global inequality.4
The Impact of Globalisation
The populous Asian countries that have grown more rapidly than the rich
countries in per capita terms since about 1980 have at the same time become much
more integrated into the international economy. In the important case of China, for
example, in the two decades since the Deng Xiaoping-led government instituted the
new national policy of ‘opening-to-the-outside-world’, trade has quadrupled as a
proportion of GDP from 8.5 per cent in 1978 to 36.5 per cent in 1999, and China has
moved from being almost closed to foreign direct investment (FDI) to being the
largest destination for FDI in the developing world.
In his contribution to the volume, Dollar marshals the evidence in favour of the
proposition that the move to more outward-oriented policies has been one of the
crucial reasons for stronger economic growth in these countries. This evidence takes
three forms: cross-country studies that suggest a causal link from more openness to
faster growth; case studies of individual countries (which have now been supplemented
by research within China described by Shang-Jin Wei in the volume); and firm-level
studies. Dollar (this volume, pp 17–18) summarises the general tenor of this
evidence with a quote from Peter Lindert and Jeffrey Williamson (2001):
The doubts that one can retain about each individual study threaten to block our view of
the overall forest of evidence. Even though no one study can establish that openness to
trade has unambiguously helped the representative Third World economy, the
preponderance of evidence supports this conclusion…As far as we can tell, there are no
anti-global victories to report for the postwar Third World. We infer that this is because
freer trade stimulates growth in Third World economies today...
What is true on average need not be true in all cases, however, and Nancy Birdsall,
in her contribution to the volume, cautions that an open trading regime, or an open
capital account, has not necessarily led to economic growth, particularly for
developing countries with an undiversified, heavily commodity-dependent export
base. She argues that these countries, as a group, have not eschewed integration with
the global economy – before suffering severe adverse terms-of-trade shocks, they
traded as much as less-commodity dependent countries, and they have significantly
4. The different conclusions about the recent trend in global inequality also arise as a consequence of
different estimates of recent output growth in China. Both Dollar and Dowrick and Akmal are careful
to point out the significant degree of statistical uncertainty surrounding their estimates of the recent
trend in global inequality. The technical shortcoming in the calculation of PPPs, which is described
in more detail by both Dowrick and Harper in the volume, involves the use of the Geary-Khamis
method to aggregate PPPs for much of the world (although the OECD and Eurostat now use the
conceptually preferable Elteto-Köves-Szulc method for comparing living standards within the
OECD). It is also clear that, whether or not global inequality has been declining over the most recent
couple of decades, the poor economic performance of much of Africa, were it to continue into the
future, would eventually dominate the effect of robust Asian growth, with the result that the global
Gini coefficient would again begin to rise some time in the next decade or so (Sala-i-Martin 2002).
Introduction
5
reduced tariff barriers to trade – but despite that, their economic performance over
the past couple of decades has been disappointing. In Birdsall’s view, the international
trading system has worked particularly to the benefit of countries with well-developed
institutions and internal markets; for countries without these attributes, opening up
to the global economy has not always been a recipe for economic success.
Robert Wade, in his contribution to the volume, makes a related point when he
argues that many countries that experienced rapid economic growth, particularly
those in east Asia, did not integrate with the global economy simply by eliminating
barriers to international competition, but instead sought to expose domestic producers
to a level of competition sufficient to make them more efficient, but not drive them
out of business. In Wade’s view, explicit policies for building competitive domestic
industries, which might involve preferential treatment for some sectors over others,
are an essential part of successful integration with the global economy.
Whether or not one agrees with these arguments, it is also of interest that
integration with the global economy appears to have had little systematic effect on
income inequality within developing countries, according to Dollar. He cites
prominent examples where international integration has been accompanied by a
widening of income inequality, such as China, and others where income inequality
has narrowed, such as Vietnam.
Indeed, the links between globalisation and income inequality appear to be quite
subtle ones. Returning to the example of China, the overall trends – with rapidly
rising trade shares being accompanied by rising levels of national income inequality
– might lead one to suspect that widening Chinese income inequality has been a
consequence of international integration. But the results reported by Shang-Jin Wei
in the volume suggest a more complex story.
Wei studies changes in urban/rural inequality in a large sample of Chinese ‘cities’
(which comprise both urban and rural counties under the jurisdiction of the city
government) over the period from 1988 to 1993. He finds strong evidence that those
cities that exhibited a larger increase in openness (as measured by the rise in their
exports to local GDP) not only experienced faster economic growth but, more
surprisingly, also a larger decline in urban/rural inequality.5
Integrating with the global economy has therefore had two offsetting effects on
Chinese inequality. On the one hand, regions that traded more have grown more
rapidly, which has tended to raise inter-regional income inequality in China (since
these regions were on average richer to start with). On the other hand, however,
inequality has tended to fall within regions that have become more open, with the
faster average growth therefore being of disproportionate benefit to the poorer rural
counties in these regions.6 Since the slow-growing regions are often hindered by
5. Wei’s statistical technique also enables him to establish the direction of causation of this relationship
– with more openness causing the decline in inequality.
6. Wei’s statistical estimates are too imprecise for him to determine which of these two effects
dominates, and so the impact on aggregate Chinese income inequality of integrating with the global
economy remains unclear.
6
David Gruen and Terry O’Brien
geography and transport infrastructure from participation in trade, these regional
growth differences imply domestic policy challenges to spread the benefits of
growth to the poorer regions.
Adarsh Kishore, in his discussion of the Indian experience with globalisation,
draws attention to a similar phenomenon. India began its economic liberalisation
program in earnest in the aftermath of a balance of payments crisis in 1991, and
annual economic growth in India has averaged an impressive 6 per cent since then.
This improved economic performance appears to have contributed to a huge fall in
the numbers of people in India living in extreme poverty. As is the case in China,
however, stronger economic growth has not been spread evenly across the country,
with richer states (which tend to be coastal, and more able to integrate with the global
economy) tending to grow more rapidly than poorer states during the 1990s. So
Kishore also argues that this uneven performance suggests a key role for national
policy in broadening the regional distribution of the benefits from growth.
While globalisation appears to have had little systematic effect on income
inequality within the developing countries according to Dollar, it is quite conceivable
that its effects on income inequality within the developed countries might be
different. Tim Smeeding, in his contribution to the volume, contrasts
income-inequality trends within the OECD countries over the period from the
early/mid 1970s to the mid/late 1980s, with those over the period from the
mid/late 1980s to the mid/late 1990s. In the earlier period, income inequality rose in
some countries and fell in others, with no clear overall pattern, while it rose across
almost the whole of the OECD in the later period.
The phenomenon of rising income inequality in the developed countries in the
1990s, Smeeding argues, has been predominantly a consequence of incomes rising
at the top of the distribution rather than falling at the bottom. In his view,
globalisation has been one force among many accounting for this widening income
inequality within the OECD, but domestic policies – labour market institutions,
welfare policies, etc – remain a powerful countervailing force to market-driven
inequality. As he puts it, ‘globalisation does not force any single outcome on any
country [because] [d]omestic policies and institutions still have large effects
on…inequality within rich and middle-income nations, even in a globalising world
economy.’ (Smeeding (this volume), p 179)
The benefits of globalisation would undoubtedly be greater, especially for many
developing countries, if markets in developed countries were more open to
developing-country exports. Many of the poorest commodity-dependent developing
countries would benefit greatly, in terms of overall economic growth and also
poverty alleviation, if they were granted better access to developed-country markets.
In his comments in the volume, Ken Henry dramatises this point with the case of
Burkina Faso, a tropical land-locked African country that has been continuously
among the poorest 20 countries on earth for the past quarter-century. Burkina Faso
exports cotton, but world cotton prices are kept artificially low as a consequence of
the recent US Farm Bill and similar policies. Were it not for these subsidies
depressing world cotton prices, the numbers of Burkinabe in extreme poverty could
Introduction
7
be halved in six years, according to IMF and World Bank estimates reported by
Henry.
Statistical Issues
Statements about global poverty, living standards, and inequality, rest on statistical
evidence, most of which is collected and compiled by national statistical offices. The
three main relevant types of statistical information are national household surveys
of income or consumption; national accounts measurement of per capita GDP; and
international comparisons of the purchasing power of currencies after allowance for
national price differences, using purchasing power parities or PPPs.
As noted in Peter Harper’s paper in the volume, countries’ preparation of national
accounts has been improved and largely standardised through national statisticians’
co-operation in the United Nations’ Statistical Commission, leading to agreement on
successive versions of the United Nations System of National Accounts. But
international efforts to improve the quality of household income or expenditure
surveys and of PPPs are not nearly so advanced, notwithstanding the System of
National Accounts’ recommendation that PPPs should be used when the object is to
compare the volumes of goods or services produced or consumed per head.
The World Bank’s International Comparison Program (ICP) represents an
important effort to improve the conceptual coherence, statistical quality, timeliness,
distribution and maintenance of PPPs, as Peter Harper’s paper explains. A plan to
conduct an improved round of PPP comparisons for the benchmark year of 2003 is
currently well advanced, with results becoming available around 2005. This process
could be assisted by widespread participation in the ICP by members of the G-20,
and where appropriate, by contributions of technical or financial assistance to this
important part of the world’s international statistical architecture. A healthy ICP
would help to improve the international comparability of price and value data, and
enable technical improvements in the PPP estimates to be incorporated over time.
As Peter Harper and Tim Smeeding note in their papers, an expert group on
household income statistics comprising eminent national and international
statisticians, the so-called ‘Canberra Group’, has recently completed a framework
outlining the principles of good household survey principles and practice (Canberra
Group 2001). This affords the possibility for national statisticians in G-20 countries
to take the lead in applying these principles and practices, thereby improving the
quality and international comparability of national household surveys of expenditure
or consumption.
Finally, both Peter Harper and Tim Smeeding argue that the Luxembourg Income
Study (LIS) provides a co-operative means of improving the quality and international
comparability of income distribution data among participating countries (so far,
mainly the richer countries of the OECD). Broadening the range of G-20 members
participating in the LIS would thereby also improve the quality of our estimates of
global inequality and poverty.
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David Gruen and Terry O’Brien
References
Canberra Group (Expert Group on Household Income Statistics) (2001), Final Report and
Recommendations, Statistics Canada on behalf of the Canberra Group, Ottawa.
Deaton A (2002), ‘Is World Poverty Falling?’, Finance & Development, 39(2), pp 4–7.
Dowrick S and M Akmal (2002), ‘Contradictory Trends in Global Income Inequality: A Tale
of Two Biases’, The University of Hong Kong, School of Economics and Finance,
Discussion Paper No 355; an earlier version is available at <http://ecocomm.anu.edu.au/
economics/staff/dowrick/dowrick.html>.
Lindert P and J Williamson (2001), ‘Does Globalization Make the World More Unequal?,
NBER Working Paper No 8228.
Sala-i-Martin X (2002), ‘The Disturbing “Rise” of Global Income Inequality’, NBER
Working Paper No 8904.